Edited by Jeroen C.J.M. van den Bergh
Chapter 29: Strategic environmental policy and foreign trade
Alistair M. Ulph* 1. Introduction - the issues To understand what is meant by strategic environmental policy in the context of international trade, note that much economic analysis of a specific environmental problem is of a partial nature. For example, if a firm is discharging pollution to a river, then the usual economic policy advice would be to impose an emission tax equal to marginal damage costs or an emission standard such that marginal abatement costs equal marginal damage costs. Such a policy may have quite widespread effects: the firm may have to raise its prices, which will affect consumer demand for other products; the firm may have to buy special pollution abatement equipment and lay off some of its production workers, who must find employment in other sectors. If the firm is involved in international trade some of these effects may be felt in other countries - the firm may lose market share to international competitors, or the pollution abatement equipment it uses may be imported. However, from the welfare maximization perspective that underlies much economic policy advice, these effects of the original policy can be ignored as long as in all other sectors there are either no distortions or any distortions have been corrected by appropriate policies; these effects are just the normal effects of resources being correctly reallocated in response to the original policy. In particular, provided each government corrects the environmental externalities in its own country, it can ignore the effects of its environmental policy on...
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